Does Illinois sales tax apply to a mobile app subscription and bundled distributor services sold by a multi-level-marketing company?

Plain-English summary

An out-of-state multi-level-marketing (MLM) company that sells nutritional and dietary products asked the Illinois Department of Revenue whether Illinois sales tax applies to a new mobile application program for its distributors, and to a "bundle" package (dashboard, personal website, and mobile app) sold for a single monthly fee. Because this was a general request for guidance rather than a fully worked-out fact pattern, the Department issued a General Information Letter (GIL) rather than a binding Private Letter Ruling, and its answer is a framework rather than a flat yes-or-no.

The core rule: Illinois Retailers' Occupation ("sales") Tax and Use Tax apply only when tangible personal property is transferred. Viewing, downloading, or streaming data over the internet is not, by itself, a transfer of tangible personal property. If a service (like access to a mobile app or dashboard) comes with no transfer of tangible personal property — for example, truly cloud-based software that is never downloaded to the customer's device — the charge is generally not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

But if canned (pre-written) computer software is transferred or downloaded as part of the service — including things like an API, applet, desktop agent, or remote access agent that lets the subscriber use the provider's network — that transfer is taxable computer software unless it qualifies as a non-taxable license under the Department's strict five-part test (86 Ill. Adm. Code 130.1935(a)(1)), which requires, among other things, a signed written license agreement — a box merely clicked "I agree" does not qualify. The Department also addressed membership fees (generally not taxable unless tied to receipt of tangible property or services with property transferred) and, separately, explained how manufacturers, importers, or wholesalers can register and remit Retailers' Occupation Tax on behalf of their local distributors through an "agency agreement" under 86 Ill. Adm. Code 130.550.

What this means for you

MLM companies and distributors with app-based tools

Whether your mobile app, dashboard, or personal-website subscription is taxable in Illinois depends on the technical delivery method, not on how you label or bundle the fee. If the app/dashboard is accessed purely through the cloud with nothing downloaded to the distributor's device, the monthly fee is generally not subject to Illinois sales/use tax. If any canned software component is downloaded (or an API/agent is installed to enable access), that component is taxable unless it meets all five conditions for a non-taxable software license — most importantly, a signed written license agreement, not a clickwrap "I agree."

SaaS and software vendors generally

This letter is a useful illustration of Illinois's approach to computer software taxability: "canned" software is taxable tangible personal property regardless of the transmission method (download, disc, electronic delivery, etc.), unless it is custom-written to the customer's specifications or structured as a compliant non-taxable license. Cloud-based delivery where nothing is ever downloaded to the customer's computer is treated as not currently subject to tax.

Distributors and retailers using agency/consolidated filing arrangements

Separately from the software question, the letter confirms that manufacturers, importers, or wholesalers may enter into a Department-approved "agency agreement" (using form RR-80) to register, file returns, and remit Retailers' Occupation Tax on behalf of their local distributors, collecting tax based on the ultimate retail selling price to consumers. Distributors covered by such an agreement don't need to separately register or file, but should keep a copy of the agreement in case the Department asks for proof; distributors may also opt out and remit their own tax.

Accountants and tax professionals

Because this is a GIL, it is explicitly not a statement of Department policy and is not binding — it only points the taxpayer to the relevant regulations (86 Ill. Adm. Code 130.1935, 140.101, 130.401(d), 130.550, etc.). If a client needs a binding answer on a specific transaction, a Private Letter Ruling request under 2 Ill. Adm. Code 1200.110 is the appropriate vehicle.

Common questions

Q: Is a mobile app subscription automatically subject to Illinois sales tax?
A: Not automatically. The Department treats mere viewing, downloading, or transmitting of data/software over the internet as not, by itself, a transfer of tangible personal property. Tax attaches only when tangible personal property (including canned computer software) is actually transferred to the customer.

Q: What if the mobile app and dashboard are sold together as one "bundle" fee?
A: The letter doesn't give a single bundled-fee number; instead it directs the taxpayer to analyze each component. If the bundle includes a taxable software transfer (e.g., a downloaded app or installed access agent that isn't a compliant non-taxable license), that portion is generally taxable; components involving no transfer of tangible personal property generally are not.

Q: Can a software license avoid sales tax in Illinois?
A: Yes, but only if it satisfies all five requirements of 86 Ill. Adm. Code 130.1935(a)(1): a signed written agreement, restrictions on duplication/use, a ban on sublicensing without the licensor's continued control, a replacement-copy or archival-copy policy, and a requirement to destroy or return the software at the end of the license term. A "click to agree" online license does not satisfy the signed-written-agreement requirement.

Q: Are membership fees taxed the same way?
A: Generally, membership fees are treated as an intangible and are not subject to Retailers' Occupation Tax or Use Tax, per 86 Ill. Adm. Code 130.401(d) — unless the membership entitles the customer to receive tangible personal property, or to a service that includes a transfer of tangible personal property, in which case tax may apply depending on the provider's activities.

Q: What is an "agency agreement," and does it apply here?
A: It's a separate arrangement (86 Ill. Adm. Code 130.550, form RR-80) allowing manufacturers, importers, or wholesalers to register, file, and remit Retailers' Occupation Tax on behalf of their local distributors, rather than each distributor filing its own return. It must be approved by the Department and is subject to objection by affected retailers. The letter mentions it as background information relevant to an MLM's distributor network, separate from the software-taxability analysis.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter issued under 2 Ill. Adm. Code 1200.120, which by definition is not a statement of Department policy and is not binding on the Department, even as to the requesting taxpayer.

Citations and references

• 35 ILCS 120/2 (Retailers' Occupation Tax Act, imposition of tax)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulations)
• 35 ILCS 105/3 (Use Tax Act, imposition of tax)
• 86 Ill. Adm. Code 150.101 (Use Tax regulations)
• 86 Ill. Adm. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax regulations)
• 35 ILCS 120/2-25 (definition of computer software)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software, including the five-part non-taxable license test)
• 35 ILCS 115/3 (Service Occupation Tax Act, imposition of tax)
• 86 Ill. Adm. Code 130.401(d) (membership fees not gross receipts from tangible personal property)
• 86 Ill. Adm. Code 130.2105 (newspapers and magazines not subject to tax)
• 86 Ill. Adm. Code 130.550 (filing of returns for retailers by suppliers/agency agreements)
• 2 Ill. Adm. Code 1200.110 (procedures for requesting Private Letter Rulings)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0036-gil.pdf

Original ruling text

ST 17-0036-GIL 11/21/2017

MISCELLANEOUS

Manufacturers, importers or wholesalers can enter into an "agency agreement" with the
Department, whereby they register, file returns and remit Retailers' Occupation Tax on behalf
of their local distributors. See 86 Ill. Adm. Code 130.550. (This is a GIL.)

November 21, 2017

Dear Xxxxx:
This letter is in response to your letter dated October 9, 2017, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
COMPANY sells nutritional and dietary products through a multi-level network of
independent distributors. COMPANY is considered an “MLM” or multi-level marketer
such as Amway. COMPANY’s only United States-based physical location is in CITY,
STATE. COMPANY charges sales tax based upon the address to which we ship and
based upon full suggested retail price. On behalf of COMPANY and its COMPANY
independent distributors, COMPANY files one consolidated state sales/excise tax return
in lieu of each independent distributor filing a separate return with your state.
While we have obtained previous rulings from your state on the taxability of our
products and charges, we would like to ensure that our sales tax collection procedures
are in compliance with all current law. Please provide us with a letter ruling or binding
opinion on the taxability of our mobile application program and also the taxability of the
mobile application program as part of a bundle sale.
Upcoming Mobile application program:
Distributors will have the option to download the software for COMPANY’s mobile
application program. Access to this mobile application program will be free for the first
30 days after which a nominal fee of $$ will be charged each month. This fee maintains
the user’s password and log in to be valid for use of COMPANY’s mobile application.
Bundle program:

ST 17-0036-GIL
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COMPANY will also offer its Distributors a “bundle” of services for one fee. This
“bundle” service will include the dashboard, personal website and mobile application
program. The monthly fee for these services will be $$/month. The COMPANY
distributor dashboard service provides a distributor with immediate 24/7 access to
information on all activity on the distributorship and online tools to track, manage and
grow the business. More specifically, the distributor can view the data concerning the
sales and sponsoring volume of their downline. Personal websites allow the distributor
to give COMPANY presentations through a mobile device. The Personal websites also
enable the distributor to add customers and downline distributors to their own shopping
cart and online sponsoring. This personal website software can be accessed, but
cannot be downloaded to their computers. It will also include the Mobile application
program as detailed above.
DEPARTMENT’S RESPONSE:
Sales Tax
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this
State, any kind of tangible personal property that is purchased anywhere at retail from a retailer. See
35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These taxes comprise what is commonly known as
“sales” tax in Illinois. If the purchases occur in Illinois, the purchasers must pay the Use Tax to the
retailer at the time of purchase. The retailers are then allowed to reduce the amount of Use Tax they
must remit by the amount of Retailers' Occupation Tax liability which they are required to and do pay
to the Department with respect to the same sales. See 86 Ill. Adm. Code 150.130.

Service Transactions
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under the Service
Occupation Tax Act, businesses providing services (i.e., servicemen) are taxed on tangible personal
property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101. The purchase
of tangible personal property that is transferred to the service customer may result in either Service
Occupation Tax liability or Use Tax liability for the servicemen depending upon his activities. The
serviceman’s liability may be calculated in one of four ways:
(1)

separately-stated selling price of tangible personal property transferred incident to
service;

(2)

50% of the serviceman's entire bill;

(3)

Service Occupation Tax on the serviceman's cost price if the serviceman is a registered
de minimis serviceman; or

ST 17-0036-GIL
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(4)

Use Tax on the serviceman's cost price if the serviceman is de minimis and is not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax
Act.

The Department does not consider the viewing, downloading or electronically transmitting of
video, text and other data over the internet to be the transfer of tangible personal property. However,
if a company provides services that are accompanied with the transfer of tangible personal property,
including computer software, such service transactions are generally subject to tax liability under one
of the four methods set forth above.
If a transaction does not involve the transfer of any tangible personal property to the customer,
then it generally would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation
Tax, or Service Use Tax.
Computer Software
“‘Computer software’ means a set of statements, data, or instructions to be used directly or
indirectly in a computer in order to bring about a certain result in any form in which those statements,
data, or instructions may be embodied, transmitted, or fixed, by any method now known or hereafter
developed, regardless of whether the statements, data, or instructions are capable of being perceived
by or communicated to humans, and includes prewritten or canned software.” 35 ILCS 120/2-25.
Generally, sales of “canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it is
transferred or transmitted, including tape, disc, card, electronic means, or other media. 86 Ill. Adm.
Code 130.1935. However, if the computer software consists of custom computer programs, then the
sales of such software may not be taxable retail sales. Custom computer programs or software are
prepared to the special order of the customer. The selection of pre-written or canned programs
assembled by vendors into software packages does not constitute custom software unless real and
substantial changes are made to the programs or creation of program interfacing logic. See 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is considered to be
canned computer software.
If transactions for the licensing of computer software meet all of the criteria provided in
subsection (a)(1) of Section 130.1935, neither the transfer of the software nor the subsequent
software updates will be subject to Retailers' Occupation Tax. A license of software is not a taxable
retail sale if:
A)

It is evidenced by a written agreement signed by the licensor and the customer;

B)

It restricts the customer’s duplication and use of the software;

C)

It prohibits the customer from licensing, sublicensing or transferring the software to a
third party (except to a related party) without the permission and continued control of the
licensor;

D)

The licensor has a policy of providing another copy at minimal or no charge if the
customer loses or damages the software, or permitting the licensee to make and keep
an archival copy, and such policy is either stated in the license agreement, supported by

ST 17-0036-GIL
Page 4
the licensor’s books and records, or supported by a notarized statement made under
penalties of perjury by the licensor; and
E)

The customer must destroy or return all copies of the software to the licensor at the end
of the license period. This provision is deemed to be met, in the case of a perpetual
license, without being set forth in the license agreement.

If a license of canned computer software does not meet all the criteria the software is taxable.
Please note that the license agreements in which the customer electronically accepts the
terms by clicking “I agree” does not comply with the requirement of a written agreement signed by the
licensor and customer. In order to comply with the requirements as set out in (a)(1) of Section
130.1935 you must have a written “signed” agreement.
The Company appears to be making sales of service and may be a serviceman. As a
serviceman, the Company would not incur Retailers’ Occupation Tax. Service Occupation Tax is
imposed upon all persons engaged in the business of making sales of service on all tangible personal
property transferred incident to a sale of service, including computer software (35 ILCS 115/3), and is
calculated as explained above. Currently, computer software provided through a cloud-based
delivery system – a system in which computer software is never downloaded onto a client’s computer
and is only accessed remotely – is not subject to tax.
Computer software is defined broadly in the Retailers’ Occupation Tax Act. If a provider of a
service provides to the subscriber an API, applet, desktop agent, or a remote access agent to enable
the subscriber to access the provider’s network and services, the subscriber is receiving computer
software. Although there may not be a separate charge to the subscriber for the computer software,
it is nonetheless subject to tax, unless the transfer qualifies as a non-taxable license of computer
software.
Generally, the Department does not consider receipts from the sale of membership fees to be
gross receipts from the sale of tangible personal property. Rather, a membership fee is considered
an intangible, which is not subject to the Retailers' Occupation Tax Act or the Use Tax Act. 86 Ill.
Adm. Code 130.401(d). This is the case when the sale of membership rights does not include the
transfer of tangible personal property. However, if the membership charge entitles the customer to
receive an item of tangible personal property or to receive a service and tangible personal property is
transferred incident to that service, then that charge may result in either Retailers’ Occupation Tax
liability, Service Occupation Tax liability or Use Tax liability, depending upon the serviceman’s
activities. See 86 Ill. Adm. Code 140.101. Note, however, typically gross receipts from the sale of
newspapers and magazines in Illinois are not subject to tax under the Retailers’ Occupation Tax Act.
See 86 Ill. Adm. Code 130.2105.
Agency Agreements
We urge you to review the regulation concerning the "Filing of Returns for Retailers by
Suppliers Under Certain Circumstances" found at 86 Ill. Adm. Code 130.550. This regulation explains
that manufacturers, importers or wholesalers can enter into an "agency agreement" with the
Department, whereby they register, file returns and remit Retailers' Occupation Tax on behalf of their

ST 17-0036-GIL
Page 5

local distributors. Please note that such an arrangement must be accepted by the Department and is
subject to any written objections of the retailers that would be affected.
The Agency Agreement (RR-80) may be used to obtain approval of such an arrangement with
the Department. Under this type of agreement, the manufacturers, importers or wholesalers sell
products to local distributors and collect tax from the distributors based upon the selling price to the
ultimate consumers. The applicable tax is not based upon the sale to the local distributors. The
appropriate tax must be collected for the sale to the distributors' ultimate customers, which includes
State and any applicable local tax.
When manufacturers, importers or wholesalers operate under this type of agency agreement,
the local distributors need not register, file returns or remit taxes since the manufacturers, importers
or wholesalers have agreed to this responsibility. The local distributors should, however, retain a
copy of the agreement. If they fail to provide such documentation upon demand by the Department,
they will be required to register, file returns, and remit the appropriate amount of tax directly to the
Department. Distributors who prefer to register and remit their own taxes may opt out of the agency
agreement.
Taxpayers may acquire form RR-80 (Agency Agreement) by contacting the Department’s
Central Registration Unit located at the Illinois Department of Revenue, 101 West Jefferson,
Springfield, Illinois 62702.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Richard S. Wolters
Associate Counsel

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